New Zealand First party leader Winston Peters sided with the Labour Party over the incumbent National Party in forming a coalition government. Labor leader, Jacinda Ardern, will become the youngest prime minister to lead New Zealand in 150 years at the age of 37. This also marks a dramatic political shift in the kiwi nation.
We view the incoming coalition as openly hostile to the New Zealand dollar, all else equal, though Labour’s coalition lead is a moderating force compared with what would be the case if NZ First party leader Peters were fully in charge. This means risks increase notably for the kiwi dollar but not in an extreme fashion overnight.
Labour has previously proposed a Fed-style dual mandate for the Reserve Bank of New Zealand which sacrifices the current sole focus on price stability in order to place more emphasis on employment. Assist FX research has been clear in disputing the perceived benefits of higher inflation on employment in the medium to longer term; nonetheless, Labour’s view is not constructive for the currency.
NZ First Party leader Winston has been more overt with his currency related statements. He has consistently stated his belief that the New Zealand dollar is overvalued and proposes a system in which the central bank could directly control and devalue the currency.
More indication is needed on coalition plans before fully weighing in on NZD valuation shifts but this is clearly a move toward uncertainty with a bearish tilt for the kiwi. It will be difficult for the New Zealand dollar to exhibit sustained exchange rate strength relative to major G10 trading partners going forward until the dust settles on coalition plans.
Look for a heavy NZD in the coming months. Businesses exposed to NZD cash flows should lock in current fx rates and pare back risk to the extent possible. AUD should be the cleanest relative outperformer against NZD.
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